Over the years since 1994, we have compiled a list of terms and ideas that small business owners can use to help them better understand financing their business. If you have any specific questions you believe should go here, please send us an email to firstname.lastname@example.org or fill out our contact form! We will answer your questions promptly!
Most banks loan money based on a company’s historical profits and ability to repay the loan. Assets as collateral are important to banks but not as important as a companies’ track record. Asset-based lenders look at the considerations in reverse. They look at the value of both short-term and long-term assets and relay on the value of the assets to make the loan. They may still care about the company’s financial strength, but don’t care about it as much as the value of the assets they are going to lend money against.
Cash flow forecasts are essential to a growing business. Any business that is growing over 20% a year should use a 13 week cash flow forecast. A cash flow forecast helps you sleep at night and allows you to see in advance when you are going to have a surplus or shortage of cash to operate your business.
Accounts receivable financing is a type of asset-based loan where the lender loans money against the value of a company’s accounts receivable. This is also often called invoice factoring. Typically accounts receivable lenders will advance between 75% and 95% of the value of invoices less than 60 days old. The lender is repaid when the customer repays.
The time varies from lender to lender, but a good ball park is 7 – 10 days.
Many equipment lenders now require a business to have been established for at least 2 years before they will finance equipment. There are exceptions to the rule, especially when the borrower has other collateral that can be put up or when the value of the equipment being finances is low.
In general there are two types of factoring arrangements. Recourse factoring is treated on your books as a pure loan. While the factoring company may purchase one or all of your invoices, they have a right under their contract with you to have you pay the loan back at the point when they are 90 days from date of invoice or advance. Non-recourse factoring contracts provide an additional level of risk mitigation for you. A non-recourse factoring company buys the invoice without recourse. This means if your customer doesn’t pay then you don’t have to repay the factoring company money they advanced.
Possibly, however most banks don’t like to finance government contracts. The good news is that you have other financing options like accounts receivable financing or purchase order financing. For more details on these types of financing see our presentation on government financing. Click on this link: Financing Government Contracts
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